Manufacturers’ mood improves as trade talks heat up

Article originally posted on CoStar on July 30, 2025

American manufacturers’ mood improved for the most part in July, according to a slew of regional Federal Reserve survey releases, marking a reversal from several months of suppressed activity.

Still, the underlying data sent mixed signals about the industry’s appetite for capital investment in light of rising prices for raw materials, extended delivery times and still-uncertain tariff policy.

And despite drastic month-to-month moves and significant reshuffling among subsectors, a longer-term look at industrial production and capital goods orders shows that net activity in the industry ended the second quarter effectively flat.

Four of the five major indices of manufacturing activity produced by Federal Reserve branches returned to positive territory in July. All five — which cover multi-state regions surrounding Dallas, Kansas City, New York, Philadelphia, and Richmond — had been consistently negative for the three consecutive months following the Trump administration’s announcement in April of across-the-board tariffs. While the overall index remained negative in the Richmond region, it improved slightly from June.

General business conditions and production improved across most regions in July, with employment increasing in three of the five regions — Texas, New York, and Philadelphia — while the Richmond and Kansas City districts showed moderate declines.

Overall manufacturing employment has been effectively flat from January to June, according to the Bureau of Labor Statistics’ monthly employment reports. The bureau’s employment report for July, set for release Friday, should show if this trend continues.

Beyond the overall improvement in sentiment, though, the clearest signal across all five districts was a sharp rise in prices paid for raw materials. Four of the five districts reported their highest prices-paid index readings since the height of COVID-era inflation in summer 2022. The Richmond Fed, which reports prices paid as an annual change, reported a 6% increase, its highest reading since April 2023.

Though the indices measuring the prices manufacturers received for finished goods have increased since earlier in the year, those increases have not been as steep as the readings for indices charting the prices paid for raw materials. In the Texas survey, for example, 42% of respondents reported they paid more for raw materials in July, while only 16% reported receiving higher prices for the goods they sold the same month.

Elevated inventory levels reported in many regions may be helping to temper tariff-related price increases as manufacturers use materials stockpiled earlier in the year in production. Combined with shrinking profit margins, this has limited some of the pass-through into consumer prices.

A special question in the Kansas City region survey revealed that 56% of manufacturers reported decreasing profit margins through the second quarter, with 42% expecting continued margin compression over the coming year.

Near-term data will likely remain noisy in the coming months as manufacturers burn through pre-tariff inventory and absorb those increased costs through a combination of margin compression and consumer price passthrough.

Substantial margin compression could intensify as broader goals of increasing manufacturing capital investment meet with stretched end-users, both consumers and businesses, looking to cut costs.

Though both industrial production and capital investment have posted wild monthly swings so far in 2025, their quarterly averages were largely flat. Overall manufacturing production was up 0.1% in the second quarter, and non-defense capital goods excluding aircraft were down 0.1%.

However, that relatively flat overall reading masks significant differences among sub-sectors, highlighting policy interventions and consumer activity.

In the short term, primary metals manufacturers have appeared to benefit most from high tariffs on steel, aluminum, and copper, ramping up domestic production by 3.1% in June alone and 5% over the past year.

In the longer term, computer product manufacturing grew by more than 19% since June 2019, the strongest long-term growth among durable goods categories, boosted by the rise of generative AI and federal investments from the CHIPS Act. More recently, though, computer product manufacturing slowed, growing only 0.2% in June.

Meanwhile, a weaker housing market has left consumer demand for furniture soft, and despite a 1.3% uptick in June 2025, production has remained down more than 18% since June 2019.

Domestic supply of appliances, which often relies on imported inputs, has slowed in 2025, while automotive manufacturing has been stop-and-go, growing only 0.5% over the past year.

There’s no doubt that manufacturers are feeling the impact of tariffs, but they are deploying different strategies to deal with them and, so far, are absorbing the additional costs without passing them on to consumers.

Recent company announcements on their latest quarterly financial results highlighted a few strategies being deployed.

Automobile manufacturers are especially broadsided as they face tariffs of 25% on imports of cars that they have assembled abroad and on many car parts that go into vehicles made in the U.S. General Motors recently announced its second-quarter results, with earnings beating Wall Street estimates while incurring a bill of more than $1 billion in tariff costs during the quarter, slashing its profit margin by almost three percentage points. Toyota Motor expects a 20% decline in its operating income this year.

Taking a different approach, Stellantis, the maker of Chrysler, Dodge and Jeep brands, announced in its earnings call that it had reduced production by 6% compared to a year ago in an effort to avoid paying tariffs on imported parts. Nevertheless, it reported paying $350 million in tariffs in the quarter, a strategy that, if continued, does not seem sustainable.

In the end, by avoiding passing higher costs onto consumers through rising prices, companies will face eroding profitability, leaving fewer funds to invest in expansion, better or more advanced equipment, or new facilities. Should the action persist, it will likely impact these companies’ valuation.